Suppose you formed a porfolio of the STRIPS that exactly replicates the payoffs of the Treasury note. How much of each STRIP will you buy? What would be the cost of this porfolio?

Consider the data in the "example" sheet. (File attached). You are given the STRIP prices for March 29th 1996. You are to test whether the prices of STRIPS and that of Treasury notes are consistent. That is we are looking for mis-pricing and abitrage opportunities. There is a 6 and 1/4 Treasury note (pays 6.25% coupon semi-annually) that matures on May 1, 2000 currently selling at $1037.45. Consider the following questions:

a. Suppose you formed a porfolio of the STRIPS that exactly replicates the payoffs of the Treasury note. How much of each STRIP will you buy? What would be the cost of this porfolio?

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a. For each Treasury Note, I would buy .3125 of each STRIP maturing in May and November up to and including May 2000 plus 10 STRIPs maturing in May 2000. The cost of these STRIPs would be $1032.64 compared to one ...